CHAPTER 19

ACCOUNTING FOR INCOME TAXES

Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

Chapter Chapter
19-1 19-2

Learning
Learning Objectives
Objectives Accounting
Accounting for
for Income
Income Taxes
Taxes
1. Identify differences between pretax financial income and taxable income.

2. Describe a temporary difference that results in future taxable amounts. Fundamentals of Accounting for Financial
Review of Asset-
Asset-
Accounting for Net Operating Statement
3. Describe a temporary difference that results in future deductible amounts. Income Taxes Losses Presentation
Liability Method

4. Explain the purpose of a deferred tax asset valuation allowance.

Future taxable Loss carryback Balance sheet
5. Describe the presentation of income tax expense in the income statement. amounts and Loss Income
deferred taxes carryforward statement
6. Describe various temporary and permanent differences. Future deductible Loss carryback Uncertain tax
amounts and
7. Explain the effect of various tax rates and tax rate changes on deferred example positions
deferred taxes
income taxes. Loss
Income carryforward
statement
8. Apply accounting procedures for a loss carryback and a loss carryforward. example
presentation
9. Describe the presentation of deferred income taxes in financial statements. Specific
differences
10. Indicate the basic principles of the asset-liability method.
Rate
considerations
Chapter Chapter
19-3 19-4
 Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes
Financial Statements Tax Return
Corporations must file income tax returns following Illustration 19-1

the guidelines developed by the Internal Revenue

Service (IRS), thus they:
vs.
calculate taxes payable based upon IRS code,
Exchanges
calculate income tax expense based upon GAAP. Investors and Creditors

Amount reported as tax expense will often differ Pretax Financial Income ≠ Taxable Income
from the amount of taxes payable to the IRS. GAAP Tax Code
Income Tax Expense ≠ Income Tax Payable

Chapter Chapter
19-5 LO 1 Identify differences between pretax financial income and taxable income. 19-6 LO 1 Identify differences between pretax financial income and taxable income.

Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes Book
Book vs.
vs. Tax
Tax Difference
Difference
Illustration 19-2
GAAP
GAAPReporting 2010 2011 2012 Total
Illustration: KRC, Inc. reported revenues of $130,000 Reporting
Revenues $130,000 $130,000 $130,000 $390,000
and expenses of $60,000 in each of its first three Expenses 60,000 60,000 60,000 180,000
years of operations. For tax purposes, KRC reported Pretax financial income $70,000 $70,000 $70,000 $210,000

the same expenses to the IRS in each of the years. Income tax expense (40%) $28,000 $28,000 $28,000 $84,000
KRC reported taxable revenues of $100,000 in 2010,
Illustration 19-3
$150,000 in 2011, and $140,000 in 2012. What is the Tax
TaxReporting
Reporting 2010 2011 2012 Total
effect on the accounts of reporting different amounts Revenues $100,000 $150,000 $140,000 $390,000
Expenses 60,000 60,000 60,000 180,000
of revenue for GAAP versus tax?
Pretax financial income $40,000 $90,000 $80,000 $210,000

Income tax payable (40%) $16,000 $36,000 $32,000 $84,000

Chapter Chapter
19-7 LO 1 Identify differences between pretax financial income and taxable income. 19-8 LO 1 Identify differences between pretax financial income and taxable income.
 Book
Book vs.
vs. Tax
Tax Difference
Difference Financial
Financial Reporting
Reporting for
for 2010
2010
Illustration 19-4
Balance Sheet Income Statement
Comparison
Comparison 2010 2011 2012 Total
2010 2010
Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000 Assets:
Revenues:
Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0
Expenses:
Liabilities:
Are the differences accounted for in the financial statements? Yes
Deferred taxes 12,000
Year Reporting Requirement Income tax payable 16,000
Equity: Income tax expense 28,000
2010 Deferred tax liability account increased to $12,000
Net income (loss)
2011 Deferred tax liability account reduced by $8,000
2012 Deferred tax liability account reduced by $4,000
Where does the “deferred tax liability” get reported in the
financial statements?
Chapter Chapter
19-9 LO 1 Identify differences between pretax financial income and taxable income. 19-10 LO 1 Identify differences between pretax financial income and taxable income.

Temporary
Temporary Differences
Differences Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
A Temporary Difference is the difference between the tax Illustration: In KRC’s situation, the only difference between
basis of an asset or liability and its reported (carrying or
book) amount in the financial statements that will result in the book basis and tax basis of the assets and liabilities
taxable amounts or deductible amounts in future years. relates to accounts receivable that arose from revenue
recognized for book purposes. KRC reports accounts
Future Taxable Amounts Future Deductible Amounts
receivable at $30,000 in the December 31, 2010, GAAP-basis
Deferred Tax Liability Deferred Tax Asset represents
represents the increase in taxes the increase in taxes refundable balance sheet. However, the receivables have a zero tax
payable in future years as a (or saved) in future years as a basis.
result of taxable temporary result of deductible temporary
differences existing at the end differences existing at the end of Illustration 19-5

of the current year. the current year.

Illustration 19-
19-22 Examples of Temporary Differences

Chapter Chapter
19-11 LO 2 Describe a temporary difference that results in future taxable amounts. 19-12 LO 2 Describe a temporary difference that results in future taxable amounts.
 Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Illustration: Reversal of Temporary Difference, KRC Inc. Deferred Tax Liability

Illustration 19-6
A deferred tax liability represents the increase in taxes
payable in future years as a result of taxable temporary
differences existing at the end of the current year.

Illustration 19-4

2010 2011 2012 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
KRC assumes that it will collect the accounts receivable and report
Difference $12,000 $(8,000) $(4,000) $0
the $30,000 collection as taxable revenues in future tax returns.
KRC does this by recording a deferred tax liability.
Chapter Chapter
19-13 LO 2 Describe a temporary difference that results in future taxable amounts. 19-14 LO 2 Describe a temporary difference that results in future taxable amounts.

Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability Deferred Tax Liability

Illustration: Because it is the first year of operations for Illustration: KRC makes the following entry at the end of
KRC, there is no deferred tax liability at the beginning of the 2010 to record income taxes.
year. KRC computes the income tax expense for 2010 as
follows: Income Tax Expense 28,000
Illustration 19-9
Income Tax Payable 16,000
Deferred Tax Liability 12,000

Chapter Chapter
19-15 LO 2 Describe a temporary difference that results in future taxable amounts. 19-16 LO 2 Describe a temporary difference that results in future taxable amounts.
 Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability Deferred Tax Liability

Illustration: Computation of Income Tax Expense for 2011. Illustration: KRC makes the following entry at the end of
2011 to record income taxes.
Illustration 19-10

Income Tax Expense 28,000

Deferred Tax Liability 8,000
Income Tax Payable 36,000

Chapter Chapter
19-17 LO 2 Describe a temporary difference that results in future taxable amounts. 19-18 LO 2 Describe a temporary difference that results in future taxable amounts.

Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability E19-

Illustration: The entry to record income taxes at the end of
2012 reduces the Deferred Tax Liability by $4,000. The
Deferred Tax Liability account appears as follows at the end
of 2012.
Illustration 19-11
E19-1: Starfleet Corporation has one temporary difference
at the end of 2010 that will reverse and cause taxable
amounts of $55,000 in 2011, $60,000 in 2012, and $75,000
in 2013. Starfleet’s pretax financial income for 2010 is
$400,000, and the tax rate is 30% for all years. There are
no deferred taxes at the beginning of 2010.
Instructions
a) Compute taxable income and income taxes payable for
2010.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2010.

Chapter Chapter
19-19 LO 2 Describe a temporary difference that results in future taxable amounts. 19-20 LO 2 Describe a temporary difference that results in future taxable amounts.
 Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Ex. 19-1: Current Yr. Illustration: During 2010, Cunningham Inc. estimated its
INCOME: 2010 2011 2012 2013 warranty costs related to the sale of microwave ovens to be
Financial income (GAAP) 400,000 $500,000, paid evenly over the next two years. For book
Temporary Diff. (190,000) 55,000 60,000 75,000
purposes, in 2010 Cunningham reported warranty expense and
Taxable income (IRS) a. 210,000 55,000 60,000 75,000
a related estimated liability for warranties of $500,000 in
Tax rate 30% 30% 30% 30%
Income tax a. 63,000 16,500 18,000 22,500 its financial statements. For tax purposes, the warranty tax
deduction is not allowed until paid.
Illustration 19-12

b. Income tax expense (plug) 120,000

Income tax payable 63,000
Deferred tax liability 57,000
Chapter Chapter
19-21 LO 2 Describe a temporary difference that results in future taxable amounts. 19-22 LO 3 Describe a temporary difference that results in future deductible amounts.

Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Illustration: Reversal of Temporary Difference, Cunningham Inc. Deferred Tax Asset

Illustration 19-13
A deferred tax asset represents the increase in taxes
refundable (or saved) in future years as a result of
deductible temporary differences existing at the end of the
current year.

When Cunningham pays the warranty liability, it reports an expense

(deductible amount) for tax purposes. Cunningham reports this
future tax benefit in the December 31, 2010, balance sheet as a
deferred tax asset.
Chapter Chapter
19-23 LO 3 Describe a temporary difference that results in future deductible amounts. 19-24 LO 3 Describe a temporary difference that results in future deductible amounts.
 Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset Deferred Tax Asset

Illustration: Hunt Co. accrues a loss and a related liability Illustration: Assuming that 2010 is Hunt’s first year of
of $50,000 in 2010 for financial reporting purposes because operations, and income tax payable is $100,000, Hunt
of pending litigation. Hunt cannot deduct this amount for tax computes its income tax expense as follows.
purposes until the period it pays the liability, expected in Illustration 19-16

2011. Illustration 19-14

Chapter Chapter
19-25 LO 3 Describe a temporary difference that results in future deductible amounts. 19-26 LO 3 Describe a temporary difference that results in future deductible amounts.

Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset Deferred Tax Asset

Illustration: Hunt makes the following entry at the end of Illustration: Computation of Income Tax Expense for 2011.
2010 to record income taxes.
Illustration 19-17

Income Tax Expense 80,000

Deferred Tax Asset 20,000
Income Tax Payable 100,000

Chapter Chapter
19-27 LO 3 Describe a temporary difference that results in future deductible amounts. 19-28 LO 3 Describe a temporary difference that results in future deductible amounts.
 Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset Deferred Tax Asset

Illustration: Hunt makes the following entry at the end of Illustration: The entry to record income taxes at the end of
2011 to record income taxes. 2011 reduces the Deferred Tax Asset by $20,000.

Income Tax Expense 160,000 Illustration 19-18

Deferred Tax Asset 20,000

Income Tax Payable 140,000

Chapter Chapter
19-29 LO 3 Describe a temporary difference that results in future deductible amounts. 19-30 LO 3 Describe a temporary difference that results in future deductible amounts.

Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Illustration: Columbia Corporation has one temporary Illustration Current Yr.

difference at the end of 2010 that will reverse and cause INCOME: 2010 2011 2012 2013
deductible amounts of $50,000 in 2011, $65,000 in 2012, and Financial income (GAAP) 200,000
$40,000 in 2013. Columbia’s pretax financial income for 2010 Temporary Diff. 155,000 (50,000) (65,000) (40,000)
is $200,000 and the tax rate is 34% for all years. There are Taxable income (IRS) a. 355,000 (50,000) (65,000) (40,000)
no deferred taxes at the beginning of 2010. Columbia expects Tax rate 34% 34% 34% 34%
to be profitable in the future. Income tax a. 120,700 (17,000) (22,100) (13,600)
Instructions
a) Compute taxable income and income taxes payable for 2010.
b. Income tax expense 68,000
b) Prepare the journal entry to record income tax expense,
Deferred tax asset 52,700
deferred income taxes, and income taxes payable for 2010.
Income tax payable 120,700
Chapter Chapter
19-31 LO 3 Describe a temporary difference that results in future deductible amounts. 19-32 LO 3 Describe a temporary difference that results in future deductible amounts.
 Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset—Valuation Allowance
A company should reduce a deferred tax asset by a
valuation allowance if it is more likely than not that it
will not realize some portion or all of the deferred tax
asset.
“More likely than not” means a level of likelihood of at
least slightly more than 50 percent.
Chapter
19-33 LO 4 Explain the purpose of a deferred tax asset valuation allowance.
E19-14: Callaway Corp. has a deferred tax asset balance of
$150,000 at the end of 2010 due to a single cumulative
temporary difference of $375,000. At the end of 2011 this
same temporary difference has increased to a cumulative
amount of $500,000. Taxable income for 2011 is $850,000.
The tax rate is 40% for all years. No valuation account is in
existence at the end of 2010.
Instructions
Assuming that it is more likely than not that $30,000 of the
deferred tax asset will not be realized, prepare the journal
entries required for 2011.
Chapter
19-34 LO 4 Explain the purpose of a deferred tax asset valuation allowance.

Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
E19-14: Current Yr.
INCOME: 2009 2010 2011
Deferred Tax Asset—Valuation Allowance
Financial income (GAAP) 725,000
Temporary difference 375,000 125,000 (500,000) E19-14 Balance Sheet Presentation
Taxable income (IRS) 375,000 850,000 (500,000) -
Tax rate 40% 40% 40% 40% Assets: 2010
Income tax 150,000 340,000 (200,000) -
Deferred tax asset $ 200,000
Income tax expense 290,000 Allowance for deferred tax (30,000)
Deferred tax asset 50,000 Deferred tax asset, net 170,000
Income tax payable 340,000

Income tax expense 30,000

Allowance for deferred tax asset 30,000
Chapter Chapter
19-35 LO 4 Explain the purpose of a deferred tax asset valuation allowance. 19-36 LO 4 Explain the purpose of a deferred tax asset valuation allowance.
 Income
Income Statement
Statement Presentation
Presentation Income
Income Statement
Statement Presentation
Presentation

Formula to Compute Income Tax Expense Given the previous information related to KRC Inc.,
Illustration 19-20
KRC reports its income statement as follows.
Income tax Change in Income tax
Illustration 19-21
payable or + deferred = expense or
-
refundable income tax benefit

In the income statement or in the notes to the financial

statements, a company should disclose the significant
components of income tax expense (current and
deferred).

Chapter Chapter
19-37 LO 5 Describe the presentation of income tax expense in the income statement. 19-38 LO 5 Describe the presentation of income tax expense in the income statement.

Specific
Specific Differences
Differences Specific
Specific Differences
Differences

Temporary Differences Permanent differences are caused by items that (1)

enter into pretax financial income but never into taxable
Taxable temporary differences - Deferred tax income or (2) enter into taxable income but never into
liability pretax financial income.

Deductible temporary differences - Deferred tax Permanent differences affect only the period in which they
Asset occur, they do not give rise to future taxable or deductible
amounts.
There are no deferred tax consequences to be recognized.

Text Illustration 19-

19-22 Examples of Temporary Differences Text Illustration 19-
19-24 Examples of Permanent Differences

Chapter Chapter
19-39 LO 6 Describe various temporary and permanent differences. 19-40 LO 6 Describe various temporary and permanent differences.
 Specific
Specific Differences
Differences Specific
Specific Differences
Differences
Do the following generate: Do the following generate:
z Future Deductible Amount = Deferred Tax Asset z Future Deductible Amount = Deferred Tax Asset
z Future Taxable Amount = Deferred Tax Liability z Future Taxable Amount = Deferred Tax Liability
z A Permanent Difference z A Permanent Difference

1. The MACRS depreciation system is used for tax Future 5. Sales of investments are accounted for by the accrual Future
Taxable Taxable
purposes, and the straight-
straight-line depreciation method is method for financial reporting purposes and the
Amount Amount
used for financial reporting purposes. installment method for tax purposes.
2. A landlord collects some rents in advance. Rents Future
6. Proceeds are received from a life insurance company A
Deductible
received are taxable in the period when they are because of the death of a key officer (the company Permanent
Amount Difference
received. carries a policy on key officers).
3. Expenses are incurred in obtaining tax-
tax-exempt income. Permanent
Difference 7. Estimated losses on pending lawsuits and claims are Future
Deductible
accrued for books. These losses are tax deductible in
4. Costs of guarantees and warranties are estimated and Future Amount
Deductible
the period(s) when the related liabilities are settled..
accrued for financial reporting purposes.
Amount
Chapter Chapter
19-41 LO 6 Describe various temporary and permanent differences. 19-42 LO 6 Describe various temporary and permanent differences.

Permanent
Permanent Differences
Differences Permanent
Permanent Differences
Differences
E19-4: Havaci Company reports pretax financial income of E19-4: Current Yr. Deferred Deferred
$80,000 for 2010. The following items cause taxable income to INCOME: 2010 Asset Liability
be different than pretax financial income. Financial income (GAAP) $ 80,000
Excess tax depreciation (16,000) $ 16,000
1. Depreciation on the tax return is greater than depreciation
Excess rent collected 27,000 $ (27,000)
on the income statement by $16,000.
Fines (permanent) 11,000
2. Rent collected on the tax return is greater than rent Taxable income (IRS) 102,000 (27,000) 16,000 -
earned on the income statement by $27,000. Tax rate 30% 30% 30%
3. Fines for pollution appear as an expense of $11,000 on the Income tax $ 30,600 $ (8,100) $ 4,800 -
income statement.
Income tax expense 27,300
Havaci’s tax rate is 30% for all years, and the company expects Deferred tax asset 8,100
to report taxable income in all future years. There are no Deferred tax liability 4,800
deferred taxes at the beginning of 2010. Income tax payable 30,600
Chapter Chapter
19-43 LO 6 Describe various temporary and permanent differences. 19-44 LO 6 Describe various temporary and permanent differences.
 Specific
Specific Differences
Differences Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses

Tax Rate Considerations Net operating loss (NOL) = tax-deductible expenses

A company must consider presently enacted changes in the exceed taxable revenues.
tax rate that become effective for a particular future
The federal tax laws permit taxpayers to use the
year(s) when determining the tax rate to apply to existing
losses of one year to offset the profits of other years
temporary differences.
(carryback and carryforward).
Revision of Future Tax Rates

When a change in the tax rate is enacted, companies should

record its effect on the existing deferred income tax
accounts immediately.

Chapter LO 7 Explain the effect of various tax rates and Chapter

19-45 tax rate changes on deferred income taxes. 19-46 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.

Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses

Loss Carryback Loss Carryforward

Back 2 years and forward 20 years May elect to forgo loss carryback and
Losses must be applied to earliest year first Carryforward losses 20 years
Illustration 19-29 Illustration 19-30

Chapter Chapter
19-47 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-48 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
 Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-12 2008 2009 2010 2011
BE19-12: (Carryback) Conlin Corporation had the following
Financial income $ 300,000 $ 325,000 $ 400,000
tax information. Difference
Taxable Tax Taxes Taxable income (loss) 300,000 325,000 400,000 (480,000)
Year Income Rate Paid Rate 35% 30% 30% 29%

2008 $ 300,000 35% $ 105,000 Income tax $ 105,000 $ 97,500 $ 120,000

2009 325,000 30% 97,500

NOL Schedule
2010 400,000 30% 120,000 Taxable income $ 300,000 $ 325,000 $ 400,000 (480,000)
Carryback (325,000) (155,000) 480,000
In 2011 Conlin suffered a net operating loss of $480,000, Taxable income 300,000 - 245,000 -
which it elected to carry back. The 2011 enacted tax rate is Rate 35% 30% 30% 29%
29%. Prepare Valis’s entry to record the effect of the loss Income tax (revised) $ 105,000 $ - $ 73,500 -

carryback.
Refund $ 97,500 $ 46,500 $144,000
Chapter Chapter
19-49 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-50 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.

Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses

E19-12: Journal Entry for 2011
Income tax refund receivable
Benefit due to loss carryback
BE19-13: Rode Inc. incurred a net operating loss of
$500,000 in 2010. Combined income for 2008 and
2009 was $350,000. The tax rate for all years is 40%.
144,000
Rode elects the carryback option. Prepare the journal
144,000
entries to record the benefits of the loss carryback
and the loss carryforward.

Chapter Chapter
19-51 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-52 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
 Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-13 2008-2009 2010 2011
Financial income $ 350,000 E19-13: Journal Entries for 2010
Difference
Taxable income (loss) 350,000 (500,000) Income tax refund receivable 140,000
Rate 40% 40%
Income tax $ 140,000 Benefit due to loss carryback 140,000
NOL Schedule Deferred tax asset 60,000
Taxable income $ 350,000 (500,000)
Carryback (350,000) 350,000 Benefit due to loss carryforward 60,000
Taxable income - (150,000)
Rate 40% 40%
Income tax (revised) $ - (60,000)

Chapter Chapter
19-53 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-54 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.

Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses

BE19-14 (Carryback and Carryforward with Valuation E19-14: Journal Entries for 2010
Allowance): Use the information for Rode Inc. given in
Income tax refund receivable 140,000
BE19-13. Assume that it is more likely than not that the
Benefit due to loss carryback 140,000
entire net operating loss carryforward will not be
realized in future years. Prepare all the journal entries Deferred tax asset 60,000
necessary at the end of 2010. Benefit due to loss carryforward 60,000

Benefit due to loss carryforward 60,000

Allowance for deferred tax asset 60,000

Chapter Chapter
19-55 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-56 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
 Valuation
Valuation Allowance
Allowance Revisited
Revisited Financial
Financial Statement
Statement Presentation
Presentation

Whether the company will realize a deferred tax asset Balance Sheet Presentation
depends on whether sufficient taxable income exists
An individual deferred tax liability or asset is
or will exist within the carryforward period.
classified as current or noncurrent based on the
Text Illustration 19-37 Possible Sources of Taxable Income classification of the related asset or liability for
financial reporting purposes.
If any one of these sources is sufficient to support a
conclusion that a valuation allowance is unnecessary, a Companies should classify deferred tax accounts on
company need not consider other sources. the balance sheet in two categories:
Text Illustration 19-38 Evidence to Consider in Evaluating the ¾ one for the net current amount, and
need for a Valuation Account
¾ one for the net noncurrent amount.

Chapter Chapter LO 9 Describe the presentation of deferred

19-57 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. 19-58 income taxes in financial statements.

Financial
Financial Statement
Statement Presentation
Presentation Review
Review of
of the
the Asset-Liability Method
Asset-Liability Method

Income Statement Presentation Companies apply the following basic principles:

Companies should allocate income tax expense (or
benefit) to continuing operations, discontinued
operations, extraordinary items, and prior period
adjustments.
Companies should disclose the significant components
of income tax expense attributable to continuing
operations (current tax expense, deferred tax
expense, etc.).
Chapter LO 9 Describe the presentation of deferred
19-59 income taxes in financial statements.
(1) Recognize a current tax liability or asset for the
estimated taxes payable or refundable.
(2) Recognize a deferred tax liability or asset for the
estimated future tax effects attributable to temporary
differences and carryforwards using enacted tax rate.
(3) Base the measurement of current and deferred taxes on
provisions of the enacted tax law.
(4) Reduce the measurement of deferred tax assets, if
necessary, by the amount of any tax benefits that,
companies do not expect to realize.
Chapter
19-60 LO 10 Indicate the basic principles of the asset-liability method.
 Review
Review of
of the
the Asset-Liability Method
Asset-Liability Method
Illustration 19-43
Procedures for Computing
and Reporting Deferred
Income Taxes

¾ The classification of deferred taxes under iGAAP is always

noncurrent.
¾ Under iGAAP, an affirmative judgment approach is used, by which a
deferred tax asset is recognized up to the amount that is probable
to be realized. U.S. GAAP uses an impairment approach.
¾ iGAAP uses the enacted tax rate or substantially enacted tax rate.
(“Substantially enacted” means virtually certain.) For U.S. GAAP,
the enacted tax rate must be used.

Chapter Chapter
19-61 LO 10 Indicate the basic principles of the asset-liability method. 19-62

¾ The tax effects related to certain items are reported in equity
under iGAAP. That is not the case under U.S. GAAP, which charges
or credits the tax effects to income.
¾ U.S. GAAP requires companies to assess the likelihood of uncertain
tax positions being sustainable upon audit. Potential liabilities must
be accrued and disclosed if the position is “more likely than not” to
be disallowed. Under iGAAP, all potential liabilities must be
recognized. With respect to measurement, iGAAP uses an
expected-value approach to measure the tax liability, which differs
from U.S. GAAP.
Chapter
19-63
Fiscal Year-2009
Allman Company, which began operations at the beginning of 2009,
produces various products on a contract basis. Each contract
generates a gross profit of $80,000. Some of Allman’s contracts
provide for the customer to pay on an installment basis. Under
these contracts, Allman collects one-fifth of the contract revenue
in each of the following four years. For financial reporting
purposes, the company recognizes gross profit in the year of
completion (accrual basis); for tax purposes, Allman recognizes
gross profit in the year cash is collected (installment basis).
Chapter LO 11 Understand and apply the concepts and
19-64
procedures of interperiod tax allocation.
 Fiscal Year-2009 Fiscal Year-2009
Presented below is information related to Allman’s operations for 2009.
1. In 2009, the company completed seven contracts that allow for the
customer to pay on an installment basis. Allman recognized the
related gross profit of $560,000 for financial reporting purposes.
It reported only $112,000 of gross profit on installment sales on the
2009 tax return. The company expects future collections on the
related installment receivables to result in taxable amounts of
$112,000 in each of the next four years.
3. The company warrants its product for two years from the date of
2. At the beginning of 2009, Allman Company purchased depreciable completion of a contract. During 2009, the product warranty liability
assets with a cost of $540,000. For financial reporting purposes, accrued for financial reporting purposes was $200,000, and the
Allman depreciates these assets using the straight-line method over amount paid for the satisfaction of warranty liability was $44,000.
a six-year service life. For tax purposes, the assets fall in the five- Allman expects to settle the remaining $156,000 by expenditures of
year recovery class, and Allman uses the MACRS system. $56,000 in 2010 and $100,000 in 2011.
Chapter Chapter
19-65 LO 11 19-66 LO 11

Fiscal Year-2009 Taxable Income and Income Tax Payable-

Payable-2009
4. In 2009 nontaxable municipal bond interest revenue was $28,000. The first step is to determine Allman Company’s income tax
5. During 2009 nondeductible fines and penalties of $26,000 were paid. payable for 2009 by calculating its taxable income.
6. Pretax financial income for 2009 amounts to $412,000.
Illustration 19A-1
7. Tax rates enacted before the end of 2009 were:
¾ 2009 50%
¾ 2010 and later years 40%
8. The accounting period is the calendar year.
9. The company is expected to have taxable income in all future years.
Illustration 19A-2

Chapter Chapter
19-67 LO 11 19-68 LO 11
 Computing Deferred Income Taxes – End of 2009 Deferred Tax Expense (Benefit) and the Journal
Illustration 19A-3 Entry to Record Income Taxes - 2009
Computation of Deferred Tax Expense (Benefit), 2009
Illustration 19A-5

Illustration 19A-4

Computation of Net Deferred Tax Expense, 2009 Illustration 19A-6

Chapter Chapter
19-69 LO 11 19-70 LO 11

Deferred Tax Expense (Benefit) and the Journal Financial Statement Presentation - 2009
Entry to Record Income Taxes - 2009
Companies should classify deferred tax assets and liabilities as
Computation of Total Income Tax Expense, 2009 current and noncurrent on the balance sheet based on the
Illustration 19A-7
classifications of related assets and liabilities.
Illustration 19A-8

Journal Entry for Income Tax Expense, 2009

Income Tax Expense 174,000

Deferred Tax Asset 62,400
Income Tax Payable 50,000
Deferred Tax Liability 186,400
Chapter Chapter
19-71 LO 11 19-72 LO 11
 Copyright
Copyright

Financial Statement Presentation - 2009 Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
Balance Sheet Presentation of Deferred Taxes, 2009
in Section 117 of the 1976 United States Copyright Act without
Illustration 19A-9
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
Illustration 19A-10 responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.

Chapter Chapter
19-73 LO 11 19-74